Mortgage lenders advised to seek legal advice following spike in repossessions

Mortgage lenders who have repossessed a home are being advised to seek legal advice to see if they may have a professional negligence claim against their advisors, following a surge in the number of homes taken into possession over the last 12 months.

Data revealed by trade body UK Finance has shown that the number of homes repossessed by lenders in the second quarter of 2019 was up by 15 per cent compared to the same period last year.

According to the report, between April and the end of June, more than 1,270 homes were taken in possession in the UK.

An increase in repossessions is usually an indicator that borrowers are beginning to struggle to meet their mortgage payments. This is often a sign that they overstretched at the time of the original transaction, and that the mortgage transaction may have been materially different to the one that lenders were originally led to believe.

In the instance when a repossession occurs, lenders may discover that the distressed mortgage account has an underlying flaw in the original transaction which was never disclosed at the time. Those flaws are usually a failure to disclose the true nature of the purchase price or value of the subject property- facts which should be disclosed by solicitors and valuers.

Usually it is only when repossession takes place that the original transaction is reviewed again – at which point it may come to light that there were discrepancies in the mortgage application and loan.

Matthew Howarth is a partner at UK law firm Shoosmiths and is head of the company’s office in Leeds. He is a member of the Professional Negligence Lawyers Association and has more than 20 years’ experience providing leading advice on professional negligence, litigation and legal disputes for companies across the UK. He has particular experience in grouped claims for lenders where multiple mortgage transactions are the subject of professional negligence claims, enabling economies of scale to be used in pursuing shortfall losses on accounts.

Matthew said: “Professional negligence claims made by lenders against solicitors and valuers are usually predated by a rise in repossessions. Often, if the market continues to rise, borrowers are not as financially stretched and so problems in the transaction are hidden. However, when the market worsens, borrowers become distressed, which leads to repossessions.

“Metaphorically speaking, it’s a bit like an iceberg. When you see the tip of the iceberg, it’s a good idea to look beneath the surface and see what else is there.”

According to Matthew, when a repossession occurs, lenders should review the original mortgage transaction to check if there are any discrepancies between what they understood the purchase price and valuation to be and what it actually was.

He added: “There are many cases where transactions have undisclosed discounts, buyer incentives, or where the property itself was the subject of a back to back sale where the property was sold in a matter of months prior to the lender’s transactions and at a lower price. All of these factors are indicators that the value of the property was not fully disclosed and was worth less than the lender was led to believe.

“This would mean that they had lent on a purchase of a property where the value of the property was falsely overstated – often exceeding 100 per cent of the actual value of the property. If there has been material non-disclosure of incentives, or back to back transactions by the professionals involved in the mortgage transactions, then lenders should consider whether the losses they suffer in the value of their security have been caused by the conveyancing solicitor or valuer. This can make a significant difference to any potential shortfalls they are facing on their loans.

“We’ve recently seen a rise in interest by lenders in professional negligence enquiries seeking advice in the investigations of such claims. For example, we recently acted for a Buy to Let lender who approached us after reviewing an original transaction. When doing so, it was apparent that the stated purchase price which had been confirmed by the completing solicitor was false and they had therefore breached their duties of care. We successfully recovered financial damages for the lender.”


Read the latest articles and commentary from Shoosmiths or you can explore our full insights library.